It's finally happened: Chinese consumers are now the world's pre-eminent luxury shoppers, according to McKinsey & Co., accounting for about 35 percent of worldwide luxury purchases.
The newly minted purchasing power of the Chinese consumer has left most foreign brands reactive rather than proactive. While less than a quarter of luxury brands sell online direct to Chinese consumers, Chinese buyers flock to the online bazaar Taobao, owned by Alibaba (NYSE: BABA), where they can find 190,000 Chanel products, for example, we recently found in a Bomoda study. Alibaba has managed to stay one step ahead of the competition.
A recent lawsuit brought by luxury-goods maker Kering against Alibaba, which accuses the Chinese e-commerce giant of being a channel for counterfeiters, isn't a long-term solution (as we've already seen with Apple (NASDAQ: AAPL) and Samsung). The real question brands should be asking themselves is: How they can effectively combat the rising tide of interest in the gray and black markets and turn China's new luxury class into loyal customers?
Below are a four key steps Alibaba has taken that all foreign brands can learn from:
1. Localize. Every element of a brand's approach must be matched to China's distinct cultural characteristics. Great brands know how to adapt language, work with neighborhood players, leverage existing platforms and adjust strategy to fit the market. This extends to services like customer support. If the Chinese consumer is less knowledgeable or more wary, English-language email support is not going to cut it.
2. Price competitively. Brands must start to compete with the prices they list for their own products sold through their own channels in the U.S., Europe, and the rest of Asia. Chinese consumers research prodigiously - a 30-percent to 100-percent premium solely based on geography won't be appealing for them (because they'll know about it). They will simply seek other paths to purchase what they want.
3. Develop authentic brand advocates. Advocacy overwhelmingly influences consumer behavior in China. Today, most brands seek to buy their way into the hearts of consumers through sponsorship, often to little effect. Savvier brands realize advocacy is best developed through key opinion leaders ("KOLs"). These tastemakers can be found through social listening on platforms like Weibo and WeChat. China is a market whose consumers are largely wary of official centralized media. Individual digital influencers bring their own networks of followers who trust their opinions and personal shopping habits and can help make a brand they love.
4. Embrace mobile ecommerce. Alibaba and WeChat's dominance have "spoiled" the Chinese consumer, setting an expectation for simple and elegant mobile commerce experiences. Brands must compete as well as partner with these trendsetters to ensure control of brand identity and image plus future up-sell/cross-sell opportunities.
Where does this leave luxury brands in the market? If they take the initiative that, for instance, video-content owners did in the mid-2000's to combat YouTube when YouTube allowed users to place copyrighted content on its platform without permission, they will double down on their own direct to consumer efforts and further embrace the digital medium to build relationships that can last decades if effectively developed. By this, we mean localized Chinese websites, with Chinese customer-support options, payment in renminbi via popular payment platforms China Union Pay and Alipay, and favorable shipping options.
Then, as controllers of their own destiny, they can revisit relations with Alibaba and other marketplaces once they have their own localized direct-to-consumer e-commerce capabilities in place that are fully integrated with their digital marketing efforts. Much like selling through offline department stores such as Neiman Marcus, Lane Crawford or Saks can be advantageous, there is absolutely no reason a Gucci or Louis Vuitton should not pursue the digital equivalent. However, just as they would never cede all sales and control of their labels to a Lane Crawford or Saks, they must build the same direct inroads in digital before it is too late.
Commentary by Brian Buchwald, CEO and Co-Founder of Bomoda, a consumer-intelligence firm. Follow him on Twitter @Bomoda.
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